MNI STATE OF PLAY: RBNZ Hikes Rates, Signals More To Come

An expected rate hike by the Reserve Bank of New Zealand on Wednesday is expected to be followed by one more this year as the central bank moves to cool an overheating economy.

The 25bps rise in the Official Cash Rate to 0.50% was the first change since March 2020, but many observers – including former RBNZ official Grant Spencer – believe the bank will follow up with a similar move at its April meeting.

The central bank suggested more tightening was on the way as the RBNZ statement noted "that further removal of monetary policy stimulus is expected over time."

UNUSUAL

But the decision was unusual in that it did not accompany a Monetary Policy Statement, which is when the RBNZ usually chooses to make changes to its policy settings.

But these are unusual times, and the market has been waiting for this rise since August, when a last minute Covid-19 lockdown saw the RBNZ chose caution and left rates unchanged.

The NZ government has now moved on from its "COVID Zero" policy and is gradually opening the economy, and those same issues of inflation, labour shortages and a booming property market remain.

TARGETS

The RBNZ has an inflation target of between 1% and 3%, and in today's statement said it expected headline inflation to increase from the current 3.3% to above 4% in the near term.

The unemployment rate for the June quarter fell to 4.0%, with many industries reporting labour shortages.

House prices continue to be a major sign of the overheated economy, up 25.5% in the 12 months to August according to the Real Estate Institute of NZ.

Future policy moves, the RBNZ statement said, are contingent on the outlook for inflation and employment, which suggests that the RBNZ will think hard about another hike when it meets again in November.